Giving Thanks for Worker Protections—California Supreme Court and California Legislature Limit Arbitration Agreements in Employment

The California Supreme Court handed down a decision earlier this year that adds to the growing body of law surrounding mandatory arbitration agreements and delivering a victory for employees. The case is Oto, L.L.C. v. Kho (2019) 8 Cal.5th 111. This decision, plus the California Legislature’s recent legislation in AB-51, limit the extent to which employers can attempt to force their employees into binding arbitration.

Employers increasingly require their employees to sign mandatory arbitration agreements. By these agreements, employees waive their right to pursue employment actions against their employers by any means besides binding arbitration. The arbitration process often favors employers and effectively stymies employees’ efforts to vindicate their rights, protecting employers that wish to skirt the law. Employers’ reliance on mandatory arbitration has ballooned following the past decade of U.S. Supreme Court cases whittling away at employees’ right to vindicate their employment grievances in court or through an administrative proceeding. Given that mandatory arbitration agreements are so widespread, Bryan Schwartz Law has blogged about them many times, including here, here, here, here, and here.

One of the ways in which an employee may be able to escape from the requirements of a mandatory arbitration agreement is by arguing that the agreement itself is invalid, using the same legal arguments that could be made as to any contract. Oto v. Kho addressed one of these contract defenses in particular: the doctrine of unconscionability.

A contract might be unconscionable in one of two ways. First, the contract could be procedurally unconscionable. This means that the circumstances in which the contract was formed were so unfair that one of the parties could not have agreed to it based on their own free will.

Second, the contract could be substantively unconscionable. This means that the terms of the contract themselves are so unfair against one party that a court will refuse to enforce the contract.

Both were present in Oto v. Kho, the California Supreme Court ruled. The plaintiff in the case, Ken Kho, worked for One Toyota in Oakland, California, for three years before he was presented with several documents, including a mandatory arbitration agreement, by a low-level employee. Kho, whose first language is Chinese, was forced to sign the agreement immediately without a chance to review the agreement first. Later, Kho filed a complaint with the California Labor Commissioner against One Toyota for unpaid wages. One Toyota moved to compel arbitration on the eve of a hearing before the Labor Commissioner and refused to participate in the proceedings before the Labor Commissioner any further. The proceedings took place without One Toyota, and the Labor Commissioner entered an award for Kho.

The trial court vacated the award but did not compel arbitration. The court of appeal reversed, holding that, despite the apparent procedural unconscionability, the agreement was not substantively unconscionable.

The California Supreme Court disagreed. First, several aspects of the formation of the agreement smacked of procedural unconscionability. The agreement was presented to Kho at his workplace, along with other employment-related documents. No one explained the document or provided a copy in Kho’s native language, but he was required to sign it in order to keep his job. If Kho had insisted on taking the time to review the documents, his pay would have been reduced because he was paid on a piece-rate basis. The agreement was communicated to Kho by a low-level employee, indicating that One Toyota would not entertain any request for explanation. Furthermore, the low-level employee waited for Kho to review and execute the agreement, which created the impression that Kho was expected to do so immediately. One Toyota did not give Kho a copy of the executed agreement.

Moreover, the language of the agreement was rife with complex legalese and convoluted sentences. This dense paragraph was printed on tiny font; the court of appeal characterized it as “visually impenetrable.” The agreement’s deceptive nature was also apparent in how it characterized the responsibility for the costs of arbitration. The agreement set forth that the costs of arbitration would be split between the parties unless controlling case law provided otherwise, without noting that the controlling decision in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, created an exception to this default rule in employment cases. Taken together, these aspects of the agreement demonstrated that it “did not promote voluntary or informed agreement.”

Second, the agreement was substantively unconscionable. It provided no indication as to how one could bring an action in arbitration, as the agreement required. The process set forth in the mandatory arbitration agreement was as complex and intricate as the process for civil litigation, requiring arbitration to be initiated through the filing of a complaint and setting forth specific motions and discovery procedures. These procedures ran counter to the supposed benefits of arbitration—its purported speed and efficiency. The Court was also concerned that the arbitration agreement all but required claimants to hire legal counsel due to the complexity of its procedures, forcing employees to incur attorneys’ fees, whereas employees bringing wage claims have access to free legal assistance from the Labor Commissioner. Given that Kho’s mandatory arbitration agreement was both procedurally and substantively unconscionable, it was unenforceable.

The California Legislature also made a foray into mandatory arbitration provisions, amending the Fair Employment and Housing Act (“FEHA”) to protect employees against forced arbitration. The amendment, AB-51, makes it an unlawful employment action to require any current or prospective employee to waive the right to pursue their FEHA claims in court or any other forum—in other words, employers cannot require employees to sign mandatory arbitration provisions as a condition of employment. The new legislation, set to take effect on January 1, 2020, also includes a provision prohibiting employers from retaliating against any employee because of their refusal to agree to mandatory arbitration.

If you have an employment dispute against your current or former employer, contact Bryan Schwartz Law.